Paying off your debt

You're in debt. You can't pay your bills and the list seems endless. You've missed the payments on the house, car, washing machine, furniture, TV, and credit card. How do you get back on track?

Step one: chop up your credit card...

There’s no easy way out; you know that already. But you must do something or your debts will get worse. The sooner you face the problem, the easier it will be to solve it.

How much do you owe?

List details of all arrears (missed) payments, loans and credit commitments, and when they need to be paid. Some debts can cause more trouble than others. These are priority debts and you must deal with these first.

Priority debts

• Rent/mortgage arrears (you could lose your home)
• Council tax arrears (you could end up in prison)
• Fuel debts (you could be cut off)
• Water rates/community water charge (you could be taken to court)
• Second mortgage or secured loan (you could lose your home)
• Hire purchase debts (if you’ve paid less than one third, your goods could be repossessed without a court order)
• Maintenance payments, such as Child Support (bailiffs can take your goods)
• Court fines (there can be penalties if you do not pay these)
• Income Tax or VAT arrears (you could go to prison)

Non priority debts

These are still important to pay, but you can’t be sent to prison for not paying them. If you don’t make any offers to pay or explain why you can’t, then your creditors may take you to court and result in bailiffs taking your possessions away. These will then be sold to cover your debts. Non priority debts include:

• Benefits overpayments
• Credit debts, such as overdrafts, loans, hire purchase/finance, credit cards and catalogues
• Money borrowed from friends or family

Generally these penalties occur only after warnings or court action, but keep your creditors informed of your circumstances. Any money you have left over after paying your expenses and priority creditors is called your ‘available income’. You can use this to pay off your non-priority creditors.

Maximise your income

Find out how much money you have coming in, work out a budget, and try to stick to it. Do this on a weekly or monthly basis and include your take-home pay, any social security benefits and money from other sources. Work out your essentials and don’t forget occasional payments like shoe repairs, haircuts, and so on. If you spend more than your income, can you make savings anywhere? Divide up your essential outgoings from other extra expenses like clothes and repairs. Try to cut down on things like alcohol, cigarettes and eating out. You’ll have to make sacrifices. Can you get an extra part-time job for a while? Is there anything you can sell to bring in extra money to pay your debts? Do not sell anything on which you still owe money. Instead you could contact the creditor with a view to returning any items being bought on hire purchase.

I have no money to spare, what should I do?

If you have nothing to sell and no money left after you’ve done your budget and you think things are unlikely to improve, you have limited options for dealing with non-priority debts. You could either ask your creditors to write off your debt or apply for bankruptcy.

Benefits and tax

Are you receiving all the income you’re entitled to? Are you paying too much tax? Check your tax code by contacting your local tax office. Check with your local Benefits Agency office or Citizens Advice whether there are any social security benefits you could claim, such as Tax Credits. If you already receive benefits, check that you are getting your correct entitlement. Are you due a council tax rebate or Housing Benefit? Can you claim credit protection insurance on any of your loans?

Extortionate credit (e.g. loan ‘sharks’)

If you think your credit charges are sky-high you can take the matter to court but your view of what is extortionate may not be the same as the court’s. Before taking action, consult your local trading standards department or seek independent legal advice.

Borrowing again to get out of debt?

You may be tempted by newspaper ads or mailshots offering loans to pay off existing debts (sometimes called consolidation loans). Some of these loan companies offer advice on debt problems. But you have to pay for the advice and they may encourage you to take out another loan as the solution to your problems. These loans can be very expensive and you might end up worse off than before. In most cases, the lender will require you to put up your house as security. Fail to pay and you’ll lose the roof over your head. Get independent advice first. Being offered further credit is no guarantee that you can afford the repayments and a bad credit record may mean it’s difficult to get credit in the first place.

Getting advice

If you can’t tackle your debt problems yourself, you can get free advice from a Money Advice Centre or Citizens Advice. If you can’t find an advice agency, your local trading standards department may be able to put you in touch with one. You may also be able to get advice from a legal aid solicitor.

Thanks to Citizens Advice for help with this article.

Photo of cutting up card by Shutterstock